Turnarounds: Why is access to capital important?

Turnaround
New answer on Dec 18, 2020
4 Answers
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Anonymous A asked on Dec 16, 2020

In Mark C in his advice ahout Turnarounds, he suggests that asking about access to capital would be useful. I'm not planning on ever totally lifting a framework, but I don't understand the rationale for asking whether a company has access to capital - is it simply to understand whether the company could access capital to spend more on the turnaround?

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Clara
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replied on Dec 16, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

I tend to agree that, a priori, does not seem the most useful question to ask.

Given that we always have the chance to ask clarying questions, and that the right number is something below 5 -depending, of couse, on the complexity of the case-, I am not sure whether I would use one on this.

True is, however, that capital is important for a turnarround: you need financial muscle for most changes that are needed in cases like this.

Hope it helps!

Cheers,

Clara

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Allen
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replied on Dec 16, 2020
Ex-McK Experienced Hire and EM - I show you how to perform at your best

I can think of two reasons why access to capital is important:

1) You would need it to invest in some aspect of the business in order to drive future profits. So this can expand the number of options you might suggest the client do. This is similar to what you said.

2) Working Capital is important. If the business is struggling, just keeping debt covenents and making payroll is critical or the company might be forced to shut down.

But there's a general point here. Interviewers are often looking to test practical knowledge. Theoretically, there are often many possibilities, but practically speaking, given the situation described in the prompt, what do you suggest. That's often a more challenging question and a good example is it depends whether the client has access to capital and at what cost.

Hope that helps!

Allen

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Ian
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replied on Dec 18, 2020
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

I would say this is not the most important question to ask if given this sort of case. (More importantly, you should be identifying why a turnaround is required in the first place). That being said, much like for an acquisition where you need to understand cash on hand in order to make a recommendation, the same applies here.

Having capital versus not having capital drastically changes the options you have in embarking on a turnaround. This questions helps you to narrow your framework if it turns out that you have limited access to capital...any question that narrows your scope/framework is a good one.

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Adi
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replied on Dec 17, 2020
Accenture, Deloitte | Precision Case Prep | Experienced Interviewer & Career Coach | 15 years professional experience

Hey,

Any company (and specially if they are publicly traded) needs capital (money) from investors (banks for example) and other sources to survive & thrive. They need this extra money to invest in M&A, Turnaround, new product launch, R&D and other things-hope you get the point.

Getting capital cheaply is important- this means lower return expectations compared to peers as investors want the company to generate profits to pay them back. If the return expectations are higher, overall returns for the company will reduce. Amazon is a greatest example of a company that has access to huge amounts of cheap capital with much lower return expectations. Read about this..

So if a company doesnt have access to capital (and cheap capital) how are they doing to get the money to do what they want to do?! There are other ways to raise but most aren't sufficient- selling assets, carve-outs etc.

Hope that helps. Use frameworks loosely to give you a head start but dont get bogged down them.

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Clara gave the best answer

Clara

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McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut
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